A South Korean brokerage firm is raising $20 million in mezzanine debt from two to three domestic institutional investors to finance Australia’s Qantas Airways’ $140 million leasing of two airplanes.
The Local Finance Association, which oversees disaster insurance and savings money of South Korea’s local governments, decided on Oct. 31 to invest $15 million in mezzanine loans for two Airbus A330-200 aircraft that Qantas Airways will lease, according to investment banking sources on Nov. 2. Hana Financial Investment Co. Ltd., which is in charge of the $20 million fundraising in South Korea, plans to attract one or two more institutions for mezzanine financing. The mezzanine debt is expected to deliver an annual return of about 6%.
The fundraising comes as Korea Investment & Securities is tapping domestic institutions to fund Singapore Airlines’ aircraft leasing.
Aviation financing is emerging as an attractive alternative investment, and helps shore up returns for domestic institutional investors in South Korea. The Public Officials Benefit Association and the Yellow Umbrella Mutual Aid had recently put in a total of 38.6 billion won ($34 million) to fund Air France’s leasing of Boeing B777-300ER.
Aircraft leasing, introduced to South Korea about five years ago, is extending to flag carriers in Europe and Australia beyond Asia, and larger- and smaller-sized planes beyond medium-sized ones. “Most of the investment vehicles are designed in a way that by the maturity of the fund in six to seven years, their loan-to-value ratio decreases, so they tend to deliver high risk-adjusted returns,” said a local pension fund source, referring to aircraft leasing funds.
Airplane leasing funds generate 3~4% returns for senior loans, 5~6% for mezzanine debt and 8% to over 10% for equity investment. The duopoly of Boeing and Airbus in the global airliner market lowers the oversupply risks, and the liquid second-hand airplane market makes them as a safe-haven asset.
Lotte Insurance Co. Ltd., an aggressive South Korean investor in the aviation financing sector, has put about 500 billion won into aircraft leasing funds for 10 cases. The insurer had earned 4%-level annual returns in the past two straight years, bolstered by aircraft financing portfolio. “Up to now, none of our investments in airplanes has caused a problem,” Jang-han Lee, a senior investment official of Lotte Insurance, told the Korea Economic Daily in a recent interview.
But a local pension fund source cautioned that the recent rush into aviation financing pulled down returns on airplane funds pitched to the pension fund. “We need to check carefully the credit ratings of tenant airlines before putting in money,” he added.
The Local Finance Association had assets of about 1.1 trillion won under management at the end of last year: alternative investments account for 35% of its portfolio.
By Daehun Kim
<Edited by Yeonhee Kim>